Disaster Area Rules

When the President declares a federal disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, affected taxpayers become eligible for significant tax relief provisions. For EA exam purposes, you must understand the requirements, limitations, and procedures for these special disaster tax rules.

What Qualifies as a Federally Declared Disaster?

A federally declared disaster is any disaster determined by the President to warrant federal assistance. FEMA assigns a disaster declaration number (DR or EM prefix) that must be reported on tax forms.

Types of Declarations

• Major Disaster (DR): Hurricanes, earthquakes, floods, wildfires, tornadoes
• Emergency Declaration (EM): Public health emergencies, terrorist attacks

Key Point: Only losses from federally declared disasters qualify for personal casualty loss deductions under current law (2018-2025).

---

Personal Casualty Loss Deduction

TCJA Limitation (2018-2025)

Under the Tax Cuts and Jobs Act, personal casualty and theft losses are deductible ONLY if attributable to a federally declared disaster for tax years 2018 through 2025.

Standard Limitations

For personal casualty losses from federally declared disasters, two limitations apply:

Qualified Disaster Loss Exception (FDTRA 2023)

The Federal Disaster Tax Relief Act of 2023 (enacted December 12, 2024) provides enhanced relief for certain disasters:

• Disaster period: Federally declared disasters from December 28, 2019, through December 12, 2024
• Per-casualty reduction: Increased to $500 (instead of $100)
• 10% AGI floor: WAIVED for qualified disaster losses
• Itemizing not required: Can claim loss as a standard deduction increase

Calculating Casualty Loss

Casualty Loss = Lesser of:

1. Adjusted basis in the property, OR
2. Decrease in fair market value due to the casualty

MINUS: Insurance and other reimbursements

---

Section 165(i) Prior Year Election

Taxpayers suffering a disaster loss may elect to claim the loss on the prior year's tax return instead of the disaster year.

Requirements

Example Timeline

A taxpayer experiences a disaster loss from Hurricane Milton in October 2024:

• Disaster year: 2024
• Prior year election: Can claim on 2023 return
• Election deadline: October 15, 2025 (6 months after April 15, 2025)

When to Use Prior Year Election

Consider electing prior year treatment when:

• Prior year had higher income (larger deduction benefit)
• Need immediate cash flow from refund
• Prior year return not yet filed

---

Extended Filing and Payment Deadlines

Automatic Postponement

Taxpayers in federally declared disaster areas receive automatic extensions for filing returns and paying taxes. No action required if IRS address of record is in the disaster area.

2024 Disaster Relief Timeline

What Deadlines Are Extended

• Individual and business income tax returns
• Quarterly estimated tax payments
• Payroll and excise tax deposits
• Tax-exempt organization returns
• IRA and HSA contributions (with the return extension)

Getting Relief If Not Automatic

If your address of record is not in the disaster area but you were affected:

• Call the IRS disaster hotline: 1-866-562-5227
• Self-identify by writing the disaster declaration number on the return

---

Qualified Disaster Distributions (SECURE 2.0)

Overview

The SECURE 2.0 Act created permanent rules for tax-advantaged distributions from retirement accounts for disaster victims.

Key Provisions

Who Qualifies

A qualified individual must:

1. Have a principal residence in a qualified disaster area during the incident period
2. Have sustained an economic loss from the disaster

Tax Reporting

• Distributions taxable as ordinary income
• Can elect to include all income in year of distribution OR spread over 3 years
• Repayments treated as qualified rollover contributions
• Report on Form 8915-F

---

Casualty Gain Deferral Rules (Section 1033)

When insurance proceeds exceed the adjusted basis of destroyed property, a casualty gain results. This gain can be deferred if replacement property is purchased within the replacement period.

Replacement Periods

Period starts from the close of the first tax year in which gain is realized

Special Rules for Principal Residence (Section 1033(h))

For homes in federally declared disaster areas:

• Extended replacement period: 4 years (instead of 2)
• Content exclusion: Insurance for contents can be combined with structure
• Gain exclusion interaction: May combine with Section 121 exclusion ($250K/$500K)

Requesting Additional Time

If unable to replace within the replacement period:

• File for extension with IRS before period expires
• Extensions typically granted for 1 year or less
• Must show reasonable cause

---

Qualified Disaster Relief Payments (Section 139)

Tax-Free Treatment

Qualified disaster relief payments are excluded from gross income if they reimburse or pay for:

Employer-Provided Payments

Employers can provide tax-free disaster payments to employees:

• No dollar limit on amount
• Deductible to employer as business expense
• Excluded from employee income
• Not subject to payroll taxes (FICA, FUTA)
• No pre-established plan required

What Does NOT Qualify

---

Form 4684: Casualties and Thefts

Filing Requirements

• Use separate Form 4684 for each casualty or theft event
• Check the federally declared disaster box
• Enter the FEMA disaster declaration number (DR or EM prefix)

Documentation Requirements

Maintain records of:

• Date and type of casualty
• FEMA disaster declaration number
• Proof of ownership and adjusted basis
• Fair market value before and after casualty
• Insurance reimbursements received or expected
• Photographs, appraisals, police/fire reports

Safe Harbor Methods (Rev. Proc. 2018-08)

For determining casualty loss amounts:

• Cost Index Method: For personal belongings based on replacement cost
• Safe Harbor Method: For real property based on contractor estimates

Attach statement identifying which safe harbor method was used.

---

Net Operating Loss Rules

General NOL Rules (Post-TCJA)

• Carrybacks eliminated: NOLs generally cannot be carried back (only forward)
• 80% limitation: NOL deduction limited to 80% of taxable income
• Unlimited carryforward: No time limit on using NOL

Exception: Farming Losses

• Farming losses may be carried back 2 years
• Disaster losses on farm property included

Casualty Losses in NOL Calculation

Personal casualty losses from federally declared disasters:

• Can be included in NOL calculation
• No 10% AGI floor applies in NOL context

---

EA Exam Tips

FEMA declaration required: Personal casualty losses are ONLY deductible for federally declared disasters (2018-2025)

Section 165(i) deadline: 6 months after the regular due date (without extensions) of the disaster year return

$22,000 limit per disaster: SECURE 2.0 qualified disaster distributions, not per year

4 years vs. 2 years: Principal residence in disaster area gets 4-year replacement period; other property gets 2 years

Section 139 payments: Tax-free to recipient AND payroll-tax-free for employer

Form 4684: Always enter the FEMA disaster declaration number for federal disaster losses

Qualified disaster loss under FDTRA: $500 floor (not $100) and NO 10% AGI floor applies